The crypto market has been pounded lately, and more pain is on the way, predicts U.K.-based markets expert Frances Coppola.
Equity and bond markets are in turmoil amid high inflation -- and crypto investors are not being spared. Right now, cryptocurrencies such as bitcoin, typically seen as a hedge against inflation, are plummeting in value. A handful of major crypto lenders have filed for bankruptcy. Meantime, the Crypto Fear & Greed Index -- a measure of industry confidence -- is showing “extreme fear.” Issued by alternative.me, the index measures emotions and sentiments from across the crypto world each day.
That investors are anxious is not exactly surprising. In less than a year, the industry's market cap has been sliced from $3 trillion to just $957.1 billion, according to CoinMarketCap.com.
A writer and financial commentator with nearly two decades in the banking industry, Coppola joined Crypto DeFined last week to talk about the roller-coaster ride. Her top five takeaways (edited for clarity):
Crypto prices are still looking for a bottom. The specter of further interest-rate hikes is a major factor, she says. "I would expect that there would be further falls in crypto markets as long as this tightening phase goes on." Unlike 2014, when the industry recovered quickly after the fall of bitcoin exchange Mt. Gox, Coppola doesn't think there will be a fast turnaround. "This time is different, because we’ve come into a monetary tightening cycle that we haven’t seen in the whole of bitcoin’s history, and it’s possible bitcoin might not come back to its previous growth cycle.“
Now that shadow banks have collapsed, exchanges could be next. “The whole of crypto lending is collateralized one way or another. . . and the bottom has been falling out of everything," said Coppola. "We’ve seen the low hanging fruit, the shadow banks, fail. As time goes on, we might" also see one of the big exchanges fail.
Crypto markets are increasingly tied to regulated markets. The crypto ecosystem depends on the U.S. dollar "and that’s a world away from what bitcoin was meant to be originally, when bitcoin was meant to replace the existing system,” says Coppola. "There is a brutal, brutal drain of fiat currency liquidity going on in traditional markets (right now), and that ricochets out into crypto markets, as well."
Regulators are paying attention. “The main reason regulators need to get involved is the developing interconnectedness between the crypto world and mainstream finance, which is becoming dangerous," Coppola says, noting that stablecoins in the crypto world are increasingly pegged to the U.S. dollar. "That has always been the point where regulators and central banks would start to sit up and take interest.”
Ethereum could be classified as a security. While Ethereum was doing proof of work, it "escaped being defined as a security. But now that it’s moved to proof of stake, which, roughly speaking, means the more Ethereum you hold, the more votes you have, it is much more difficult to escape being caught by this general net of financial products that constitute U.S. securities.”
Watch the replay here.